How Toyota raced from behind to overtake the Big Three

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: Toyota is undoubtedly one of these high-velocity organizations, starting off far behind the American Big Three when it first entered the US market and racing ahead to become the world’s most successful automaker, with “the healthiest profits in the industry.” As Fortune wrote when putting Toyota on its 2007 list of the most admired companies.

You may recall that 25 years ago, it was just one of a herd of Asian interlopers selling fuel-efficient econoboxes, and Detroit snickered at the notion that Americans would ever want to buy many of them. As everyone now knows, that crystal ball was cloudy: Toyota’s Camry has been the bestselling car in the US since 2002, and the Lexus LS 430 has been the leading luxury-car brand for seven straight years. The company’s long-term strategy is as green as anyone’s. Sales of the Prius, which runs on a gas electric hybrid engine, passed 100,000 units in 2006. The Prius is today as de rigueur in

Hollywood as the hydrocarbon-swilling Hummer used to be.

And there’s no doubt that Toyota’s success is largely attributable to its “velocity of discovery”—the speed with which the company improves, innovates, and invents. Marvin Lieberman and his coauthors compared changes in productivity at the large automakers from the 1950s to 1987. They found that Toyota outstripped its competitors on improvements in manufacturing labor productivity. But it wasn’t the usual matter of investing more heavily in plant and equipment—replacing human labor with mechanical labor. Rather, Toyota’s capital productivity also outpaced the sector. In short, Toyota was discovering how to do ever more work, more quickly and more reliably, without using more labor or more machinery—and this process of discovery kept going decade after decade. In a separate study, Lieberman and Dhawan pointed to the durability of competitive advantage rooted in the way an organization conducts its work, even if the work it chooses to do is similar to that of others in the marketplace. Those authors found that the traditional sources of competitive advantage—differentiation and protected market niches—are not effective in the auto industry. Furthermore, when Lieberman and Dhawan compared the leading US and Japanese automakers, they found that, in terms of operational effectiveness, “lagging firms have converged only slowly to industry best practices (if at all), while stronger firms like Toyota have made continual advances, thereby maintaining or expanding their lead.”